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March 6, 2014
William R. Emmons Center for Household Financial Stability
Federal Reserve Bank of St. Louis [email protected]
These comments do not necessarily represent the views of the Federal
Reserve Bank of St. Louis or the Federal Reserve System.
Generations X and Y: Facing Economic and Financial Challenges
in the Shadow of the Baby Boom
1
EconLowdown—Little Rock
2
Generations X and Y: Facing Economic and Financial Challenges in the Shadow of the Baby Boom
Why generations matter for economic and financial outcomes
Who are Generations X and Y?
Opportunities for Gen X and Gen Y Labor markets: You’ll benefit from scarce competition.
Asset markets: We need you to buy our houses and stocks.
Economic and financial challenges facing the members of Gen X and Gen Y Damage from the Great Recession
Can living standards keep rising?
Fiscal and environmental sustainability
3
Why Generations Matter for Economic and Financial Outcomes
Think of generations as cohorts (groups) that move through their lives side-by-side—your peer group.
New generations affect overall supply and demand. A large supply of workers may push down wages; a large
number of savers may push down interest rates.
A large demand for education, employment, housing, or social insurance will affect political choices.
Each generation is unique, shaped by social, cultural, and political experiences. Historical episodes affect attitudes and behaviors.
Each generation will have its turn in charge of the economy and the political process.
4
Generations Since 1900
The “Greatest Generation,” born 1900-24 (included people who fought in WW II)
The “Silent Generation,” born 1925-45 (Depression and WW II)
“Baby Boomers,” born 1946-64
“Generation X,” born 1965-80
“Generation Y” (also called “Millennials” or “Echo Boomers”), born 1981-2000
The “Post-Millennial Generation,” born after 2000
Currently 90-114 years old
69-89
50-68
34-49
14-33
Under 14
Big winners
Big losers
?
?
?
5
Generations Since 1900: How Big?
Millions of people
Source: Census Bureau
Projections
6
Millions of people
Source: Census Bureau
Projections
Generations Since 1900: How Big?
7
Millions of people
Source: Census Bureau
Projections
Generations Since 1900: How Big?
8
Millions of people
Source: Census Bureau
Projections
Generations Since 1900: How Big?
9
Millions of people
Source: Census Bureau
Projections
Generations Since 1900: How Big?
10
Millions of people
Source: Census Bureau
Projections
Generations Since 1900: How Big?
11
Generations Since 1900: Adjusting for Different Generation Lengths
Millions of people
Source: Census Bureau
Projections
12
Generations Since 1900: Adjusting for Different Generation Lengths
Millions of people
Source: Census Bureau
Projections
13
Generations Since 1900: Adjusting for Different Generation Lengths
Millions of people
Source: Census Bureau
Projections
14
Generations Since 1900: Adjusting for Different Generation Lengths
Millions of people
Source: Census Bureau
Projections
15
Generations Since 1900: Adjusting for Different Generation Lengths
Millions of people
Source: Census Bureau
Projections
16
Generations Since 1900: Adjusting for Different Generation Lengths
Millions of people
Source: Census Bureau
Projections
17
Generations Since 1900: Adjusting for Different Generation Lengths and
Growing Overall Population
Source: Census Bureau
Projections Percent of overall
population
18
Generations Since 1900: Adjusting for Different Generation Lengths and
Growing Overall Population
Source: Census Bureau
Projections Percent of overall
population
19
Generations Since 1900: Adjusting for Different Generation Lengths and
Growing Overall Population
Source: Census Bureau
Projections Percent of overall
population
20
Generations Since 1900: Adjusting for Different Generation Lengths and
Growing Overall Population
Source: Census Bureau
Projections Percent of overall
population
21
Generations Since 1900: Adjusting for Different Generation Lengths and
Growing Overall Population
Source: Census Bureau
Projections Percent of overall
population
22
Generations Since 1900: Adjusting for Different Generation Lengths and
Growing Overall Population
Source: Census Bureau
Projections Percent of overall
population
23
Life-Cycle Stages: Which Generation Had the Largest School-Age Population?
Source: Census Bureau
Percent of overall
population
Age of the first year’s members of the generation
First year of cohort: 1900
24
Life-Cycle Stages: Which Generation Had the Largest School-Age Population?
Source: Census Bureau
Percent of overall
population First year of cohort: 1900
1925
Age of the first year’s members of the generation
25
Life-Cycle Stages: Which Generation Had the Largest School-Age Population?
Source: Census Bureau
Percent of overall
population First year of cohort: 1900
1925
1946
Age of the first year’s members of the generation
26
Life-Cycle Stages: Which Generation Had the Largest School-Age Population?
Source: Census Bureau
Percent of overall
population First year of cohort: 1900
1925
1946
1965
Age of the first year’s members of the generation
27
Life-Cycle Stages: Which Generation Had the Largest School-Age Population?
Source: Census Bureau
Percent of overall
population First year of cohort: 1900
1925
1946
1965
1981
Age of the first year’s members of the generation
28
Life-Cycle Stages: Which Generation Had the Largest School-Age Population?
Source: Census Bureau
Percent of overall
population First year of cohort: 1900
1925
1946 1965
1981
2001
Age of the first year’s members of the generation
29
Life-Cycle Stages: Which Generation Had the Largest Working-Age Population?
Source: Census Bureau
Percent of overall
population
Age of the first year’s members of the generation
30
Generations X and Y and Post-Millennials Will Be in Scarce Supply
Source: Census Bureau
Percent of overall
population
Age of the first year’s members of the generation
31
Supply and Demand in the Labor Market
Price = wage rate
Quantity = hours worked
Supply of workers
Demand for workers
W
H
32
Silent Generation Was Very Small, Baby Boom Was Very Large
[-----Silent-----]
[Baby Boom] [--Gen X--]
[----Gen Y----]
33
Silent Generation Was A Small Group => Higher Wages
Price = wage rate
Quantity = hours worked
Supply of workers
Demand for workers
W’
H’
34
Baby Boomers Were A Large Group => Lower Wages
Price = wage rate
Quantity = hours worked
Supply of workers
Demand for workers
W’’
H’’
35
Members of the Silent Generation Received Highest Incomes, Controlling for Edcn. etc.
[----------Greatest---------] [---------Silent---------] [---Baby Boom--] [------Gen X----] [-----Gen Y-----]
Source: W. Emmons and B. Noeth, “The Economic and Financial Status of Older Adults,” 2013.
36
[--------Greatest-------] [--------Silent-------] [--Baby Boom--] [----Gen X----] [-----Gen Y-----]
Source: W. Emmons and B. Noeth, “The Economic and Financial Status of Older Adults,” 2013.
Members of the Silent Generation Are Wealthiest, Controlling for Edcn. etc.
37
Life-Cycle Stages: Which Generation Had the Largest Retirement-Age Population?
Source: Census Bureau
Percent of overall
population
Age of the first year’s members of the generation
38
Supply and Demand in the Market for Retirement Assets
Quantity = financial assets
Supply of retirement assets
Demand for retirement assets
V
A
Price = stock and bond valuation (inverse of expected return)
39
Baby Boomers Save for Retirement => Expected Returns Decline
Price = stock and bond valuation (inverse of expected return)
Quantity = financial assets
Supply of retirement assets
Demand for retirement assets
V’
A’
40
Baby Boomers Sell Assets => Valuations Decline
Price = stock and bond valuation (inverse of expected return)
Quantity = financial assets
Supply of retirement assets
Demand for retirement assets
V’’
A’’
Cyclically Adjusted S&P Price-to-Earnings Ratio
Stock price divided by 10-year moving average of real earnings per share
2010009080706050403020Source: Robert Shiller /Haver Analytics
50
40
30
20
10
0
50
40
30
20
10
0 41
Baby Boomers Saved While Stocks Were Expensive; Retiring With Lower Valuation
Greatest Generation
saving
Silent Generation
saving
Greatest Generation
retiring
Silent Generation
retiring
Baby Boomers
saving
Baby Boomers retiring
Gen X saving
P/E ratio
Quarterly through Q4.2013
Real 10-Year Treasury Yield
Percent
201510050095908580757065605550Source: Haver Analytics
10
8
6
4
2
0
-2
-4
10
8
6
4
2
0
-2
-4 42
High Real Interest Rates Helped Silent Generation Save for Retirement
Quarterly through Q4.2013
Percent
Greatest Generation
saving
Silent Generation
saving
Greatest Generation
retiring
Silent Generation
retiring
Baby Boomers
saving
Baby Boomers retiring
Gen X saving
43
Slow Growth of Prime-Age Homeowners Will Dampen Housing Market for Years
Millions Annual change in
number of housing units
Annual change in
number of households aged 35-64
Projections
Baby Boomers retiring and
selling houses
Gen Y becoming homeowners
Gen X becoming homeowners
44
Economic and Financial Challenges Facing Members of Generations X and Y
Damage from the housing crash and Great Recession—especially for Gen X.
Can economic growth and rising living standards continue at earlier rates?
Long-term sustainability of current policies Environmental
Fiscal
45
Average Wealth of Young Families Plunged During Recession; Recovering Slowly
Sources: Fed. Res. Board and Fed. Res. Bank of St. Louis; Means: Triennial through 2013; medians: through 2010
Index levels equal 100 in 1989
Baby Boomers
Gen X
Silent Generation
46
Homeownership Rates Are Plunging Among the Non-Elderly
Source: Census Bureau Annual through 2013
Percent
Baby Boomers
Gen X
Silent Generation
Gen Y
47
The Workforce Will Grow Slowly, Reducing GDP Growth Potential
Source: Census Bureau Annual through 2013
Percent
Baby Boomers entering labor force
Projections
Baby Boomers leaving labor force
48
The Fiscal Deck Is Stacked Against Gen X and Especially Gen Y
Year of birth
Generation
Average per-capita lifetime net benefit from federal benefits received minus taxes paid
1923 Greatest $105,900
1933 Silent $191,100
1943 Silent $279,300
1953 Baby Boom $222,700
1963 Baby Boom $54,200
1973 Gen X -$75,250
1983 Gen Y -$160,150
1993 Gen Y -$183,400
2003 Post-Millennial -$135,100
2013 Post-Millennial -$86,900
Source: Jagadeesh Gokhale, “Fiscal and Generational Imbalances and Generational Accounts: A 2012 Update,” Cato Institute working paper, November, 2012, Table 3.
49
The Cost of Doing Nothing About the Environment
Without action, the overall costs of climate change will be equivalent to losing at least 5% of global gross domestic product (GDP) each year, now and forever.
Including a wider range of risks and impacts could increase this to 20% of GDP or more, also indefinitely.
Source: The Stern Review of the Economics of Climate Change, 2006 (www.webcitation.org/5nCeyEYJr)
50
Generations X and Y: Facing Economic and Financial Challenges in the Shadow of the Baby Boom
The Baby-Boom generation suffered from its large size, but has passed some of the adjustment costs to future generations. Housing-market adjustments
Fiscal- and environmental-sustainability challenges
Generation X suffered most from the housing crash.
Gen X and especially Gen Y are big fiscal losers.
Generations X, Y, and the Post-Millennials (in that order) are likely to benefit in labor and asset markets from their smaller size.
51
Center for Household Financial Stability
A research and policy initiative of the Federal Reserve Bank of St. Louis: www.stlouisfed.org/hfs.
Some of our specific research questions: Which families suffered the most during the financial
crisis?
Why are only some families recovering from the crisis?
What household balance-sheet characteristics are associated with financial instability?
52
To Learn More About the Financial Outlook for Young American Families
Upcoming public events: May 8-9, 2014: 2nd Annual Household Financial Stability
Research Symposium, at the St. Louis Fed.
o Topic: The Balance Sheets of Younger Americans—Is the American Dream at Risk?
o Sessions on student loans, homeownership, economic mobility, economic impacts of young families, and more.
October 16-17, 2014: Policy Symposium in Washington DC.
o Topic: The Financial Stability of Younger Americans.
o In partnership with the New America Foundation and the Young Invincibles (an advocacy group for young Americans).
Find our research, public presentations, and media coverage at www.stlouisfed.org/hfs.